The role of prepayment penalties in mortgage loans

Beltratti, Andrea, Benetton, Matteo and Gavazza, Alessandro ORCID: 0000-0001-9236-5813 (2017) The role of prepayment penalties in mortgage loans. Journal of Banking and Finance, 82. pp. 165-179. ISSN 0378-4266

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Abstract

We study the effect of mortgage prepayment penalties on borrowers’ prepayments and delinquencies by exploiting a 2007 reform in Italy that reduced penalties on outstanding mortgages and banned penalties on newly-issued mortgages. Using a unique dataset of mortgages issued by a large Italian lender, we provide evidence that: 1) before the reform, mortgages issued to riskier borrowers included larger penalties; 2) higher prepayment penalties decreased borrowers’ prepayments; and 3) higher prepayment penalties did not affect borrowers’ delinquencies. Moreover, we find suggestive evidence that prepayment penalties affected mortgage pricing, as well as prepayments and delinquencies through borrowers’ mortgage selection at origination, most notably for riskier borrowers.

Item Type:	Article
Official URL:	https://www.journals.elsevier.com/journal-of-banki...
Additional Information:	© 2017 Elsevier B.V.
Divisions:	Economics
Subjects:	H Social Sciences > HG Finance
Date Deposited:	20 Jun 2017 15:12
Last Modified:	12 Dec 2024 01:30
URI:	http://eprints.lse.ac.uk/id/eprint/81841

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